The cannabis trade

The legalisation of drugs, once a revolutionary pipedream, is going mainstream. Is it too early for investors to buy in? Simon Wilson investigates.

Why legalise drugs?

Because the so-called ‘war on drugs’ – prohibition backed by mass criminalisation and tough policing – has failed to achieve its core objective of reducing the use of drugs. Instead, it has created huge ‘collateral damage’ in consumer countries – including mass incarceration and the waste of public resources, corruption, the spread of avoidable diseases, and the use of drugs in more dangerous and adulterated forms.

More broadly, in both producer and consumer countries, it has fostered the creation of gigantic cross-border networks of organised – and sometimes brutally violent – crime. In some cases, principally in Mexico and other Central American countries, these effects have amounted to the catastrophic subversion of states.

What’s the alternative?

A groundswell of global opinion has been calling for decriminalisation and partial legalisation for years. For example, the Global Commission on Drug Policy – whose signatories include ex-UN chief Kofi Annan – supports replacing punishment with evidence-based treatment when it comes to using hard drugs such as heroin, together with regulating (and taxing) a limited legal supply of less harmful drugs, such as cannabis.

While such an approach would have seemed revolutionary just a few years ago, these days it has the support of luminaries such as ex-US Secretary of State George Shultz, ex-Fed chairman Paul Volcker, and the former presidents of Brazil and Mexico.

According to the Washington Times, the biggest funder of campaigns to legalise cannabis is George Soros, who has spent $80m since 1994. Barack Obama publicly stated last year that he thinks pot is no more dangerous than alcohol. Against such a backdrop, policy-makers are closely watching the experiments in Colorado.

What’s happening there?

At the start of the year, Colorado became the first jurisdiction anywhere in the world to create a legal, regulated market in marijuana sold purely for recreational purposes. (Already 20 US states and Washington DC, and several other countries, allow access to the drug with a doctor’s prescription). There are strict licensing and usage conditions on who can buy and who can sell, as well as on quantities and where the stuff can be consumed (only in private homes, not Amsterdam-style coffee shops).

But it remains a landmark that has been ecstatically welcomed by potheads and libertarians across America – so much so that Colorado recently doubled its forecast of its tax take from pot in 2014 to $134m. (It will also save an estimated $60m in law enforcement costs.) A similar system is imminent in Washington state.

What about Europe?

Portugal has taken the most radical approach, decriminalising the use and possession (though not the supply) of all illegal drugs in 2001. Since then, rates of drug use remained in line with other European countries, and there has been a significant reduction in the use of heroin.

In 2009, the Czech Republic adopted a similar model. Spain’s approach is now similar to that of the Dutch: it has decriminalised purchases for individual consumption, and cannabis seeds are sold openly.

And last week, Germany took its first – for now tentative – steps towards legalisation, after a petition signed by more than 100 law professors to end the criminalisation of consumption and production of the drug was taken up in parliament.

In regards to more harmful drugs, such as cocaine and heroin, many European countries have been shifting from a punitive approach towards one of harm reduction.

Is there any interest here for investors?

The ArcView group, a network of investors in cannabis businesses, is projecting a $10bn market for marijuana and cannabis-related products within five years in the US, although that figure assumes 14 more states follow Colorado’s lead.

It also assumes that the US federal government continues to allow states to legalise pot shops when the sale of marijuana remains illegal under federal law. There are also issues around the legal framework of the trade: in February, US regulators confirmed that banks can provide services to state-regulated marijuana businesses without violating federal money-laundering laws.

Nevertheless, some banks will remain wary, meaning that many “cannabusinesses” operate entirely in cash, raising safety concerns. In other words, while there are certainly investment possibilities, they would clearly be very high-risk punts.

According to the FT’s Lex column, “the best bet may well be exposure to revenue that states get from taxing marijuana sales. That ultimately means designing bonds backed by these taxes, a far from impossible feat in US municipal debt”.

Pot-related paraphernalia

Shares in some of the biggest cannabis plays surged at the start of the year, including CannaVest, GW Pharmaceuticals and Medbox. But these firms are volatile and trade volumes are low.

One of the star names in Colorado’s burgeoning cannabis economy is OpenVape, which sells vaporiser pens that heat cannabis oil, using technology similar to that found in electronic cigarettes.

Interest in alternatives to smoking marijuana is growing fast, reckons Shannon Bond in the FT. “New customers are flocking to products such as vaporisers, edibles, infused lotions and even pills that dissolve in the mouth; hence firms that extract cannabis oil and make accessories and equipment are seeing a surge in demand.”